The Impact of Increased Implementation of IFRS on India, Research Paper Example

Abstract

The growing activity levels of global trade led to the demands of having a common set of accounting standards. The London based International Accounting Standards Board (IASB) responded by coming up with a principles-based set of accounting standards known as International Financial Reporting Standards (IFRS). Over hundred countries have pledged to converge to IFRS or permit its use. Being a leading member of the G-20 group, India also committed to converging to IFRS from 2011. This article looks into the issues related to IFRS as well as India’s challenges as the country starts its journey towards IFRS convergence, starting April 2011. IFRS carries both the advantages and challenges and will require a significant change in the way Indian companies present their financial reports. IFRS is expected to improve transparency levels in India and enhance the country’s credibility and reputation in the eyes of global investment community that has historically seen financial statements of Indian companies with deep suspicion.

Keywords: International Financial Reporting Standards (IFRS); India; GAAP; Accounting Standards; Valuations; Accounting Transparency.

Introduction

In this study, we are going to look at the potential impact of India’s convergence to the International Financial Reporting Standards (IFRS) on quality of financial reporting of Indian companies. We also examine India’s preparation as well as the challenges that are emerging. In addition, we investigate the accounting changes that may affect the valuations of Indian companies and the potential response of the international investment community.

Internet has escalated the rate of globalization in remarkable ways. It has helped transformed supply chain management, communication, cross border investments, information dissemination, trading, and outsourcing. The economies are more linked to each other than they have ever been in history and the interdependence of global economies has become apparent with the financial crises in the last two decades such as Asian financial crisis of the 1990s and the most recent financial crisis in 2007.

The realization that the huge benefits of globalization will continue to build stronger economic interdependence between nations and the potential dangers of such interdependence has led to increasing demand for uniform financial and accounting standards worldwide. International Accounting Standards Board (IASB) responded by declaring its intention to adopt standards issued by the Board of the International Accounting Standards Committee known as International Accounting Standards (IAS). IASB also announced in April 2001 that any new standards will be published in a series called International Financial Reporting Standards (IFRS) (Institute of Chartered Accountants in England and Wales).

Almost every major economy has established a timeline to converge with or adopt IRFS. They include U.S., EU, China, India, Brazil, Russia, Australia, Japan, and Canada. India is committed to converging with IFRS over a period beginning April 1, 2011 (IFRS). In all, more than one hundred and ten countries require or permit the use of IFRS. This paper is focused on the potential impact of IFRS on India and the issues that may arise.

Difference Between IFRS and GAAP

IFRS is a principles-based system of accounting standards, developed by the International Standards Accounting Board (IASB). GAAP generally takes a detailed, rules-based approach whereas IFRS is more a principles-based approach to accounting. IFRS does a better job of portraying the economic substance of the underlying transaction and thus, relies more on the professional judgments of financial statement preparers than prescribed rules (Scanlon and Patch, May 2010).

The differences between Indian GAAP and IFRS have arisen due to conceptual differences, legal and regulatory requirements, economic conditions, and level of preparedness. Some of the differences are financial instruments, insurance contracts, effects of changes in foreign exchange rates, investment property, agriculture, noncurrent assets held for sale and discontinued operations, leases, employee benefits, property, plant, and equipment, accounting policies, changes in accounting estimates and errors, and events after the balance sheet date (Haribhakti)

Advantages and Disadvantages of IFRS

We believe IFRS will accelerate the growth of cross border investments. Traditionally, only companies and investors from developed nations such as U.S. and Western Europe have been involved in cross border deals due to their vast resources and information advantage. Companies from India and China are discovering the market advantages of being a Multinational Company (MNC) and are increasingly seeking international presence through both direct investments and acquisitions. India and China’s explosive growths through international trade have provided both countries with huge investment reserves which they intend to successfully deploy all over the globe. We expect IFRS to result in better informed investment decisions and improved financial analysis of cross border investment targets. It will improve the ability to measure cross border competitors with similar economics by eliminating the confusion due to different accounting assumptions and rules. IFRS will also result in a greater financial reporting transparency in countries where financial oversight has been traditionally weak.

By enabling comparison of similar companies from different countries following same accounting standards, IFRS will lead to more efficient allocation of resources around the globe. Now the companies are not able to deploy investment resources in domestic markets only but they can also target international markets due to improved quality of information. IFRS will also reduce the burden on the parent company by eliminating the need to reformat financial statements of foreign subsidiaries to conform to local accounting standards.

Our observations are in line with a growing body of evidence that the adoption of IFRS benefits the overall economy of the country. Beneish, Miller, and Yon found increased foreign investment by countries adopting IFRS in 2005 as well as increased foreign participation in debt markets of the adopting countries. Corvig, DeFond, and Hung found increases in foreign mutual fund ownership in foreign stocks after voluntary IAS adoption between 1999 and 2002. Daske, Hail, Leuz, and Verdi found that IFRS adoption in non-U.S. markets results in lower information symmetry and greater liquidity as compared to domestic sets of standards. Barth, Landsman, and Lang found that firms voluntarily adopting IAS from 21 countries exhibit less earnings management, more timely loss recognition, and more value relevant information than firms using domestic standards (Gornik-Tomaszewski and Showerman, Spring 2010).

We do realize the burden of IFRS will be greater on smaller companies than mid-size and larger ones. IFRS will require tremendous time and financial resources to be implemented over multiple years. American company, United Technologies reported that implementing IFRS will require two to three years efforts as well as 5% of revenue. IFRS doesn’t allow LIFO for inventory purpose which is another cost for the companies. FIFO results in higher incomes as well as higher corporate taxes. By not allowing LIFO, IFRS may indicate a lower replacement cost of the company’s inventory which will not accurately reflect the economics of day to day operations of the business (Thomas, August 2009).

In our opinion, widespread adoption of IFRS also carries other potential costs. It may lead to a higher level of predatory takeovers around the world that could result in protectionist measures by local governments and possibly harm international trade relations. In addition, IFRS may also boost speculationary investments as well as the magnitude of financial panics due to the greater number of market participants. The success of IFRS greatly depends on the efforts of individual countries to enforce its requirements so IFRS may result in a misplaced trust in the reliability of financial statements of companies in countries with weaker financial regulations.

Due to a higher participation by the global investment community, corporate frauds will have a greater negative impact on the reputation and the credibility of the countries where the frauds may take place. A good example in case of India is Satyam Computers that single handedly threatened the credibility of entire Indian outsourcing industry. Luckily for India, the country’s outsourcing sector successfully convinced both the global investment community and the customers that Satyam was a distinct event and not reflective of the overall management culture in the Indian IT sector.

We also anticipate legal challenges to rise in the global investment community. A significant proportion of global investors are attracted to multinational companies because multinational companies are better hedged against economic cyclical variations in any country. When disputes may arise, there will be questions of jurisdictions since each party will prefer the jurisdiction of its own choice where the chances of victory may be higher. International disputes may also prove to be costlier as well as lengthier.

IFRS and India

The Institute of Chartered Accountants of India (ICAI) is the main regulator of accounting standards in India. ICAI has established IFRS Task Force to help the country gradually adopt IFRS starting April 2011 (BDO Haribhakti Consulting Private Limited). The standards of IFRS will be applicable to all publicly listed entities as well as public interest entities such as banks, insurance companies, and large sized entities.

The international community will be closely watching the implementation of IFRS in India. The success of IFRS implementation in India will be a great boost to the prospects of common global accounting standards. The Asia-Pacific accountancy market was estimated at $31.9 billion in 2009 and is expected to grow by 36.3% to have a size of $43.4 billion in 2014. India accounted for 17.6% of the Asia-Pacific accountancy market value in 2009; ahead of China which was slightly behind at 17.2% market share (Datamonitor, September 2010).

Benefits of IFRS to Indian Companies

We have identified a range of benefits to India through convergence to IFRS. IFRS will improve access of Indian companies to international markets. Businesses’ compliance with IFRS will increase the confidence of international capital markets in the credibility of their financial statements. Moreover, Indian companies will also be able to enjoy lower borrowing costs. Compliance with IFRS will also enable Indian companies to more accurately compare themselves with their international competitors and get more realistic picture of their global standing. Indian companies will also be able to set international benchmarks to improve quality and gain competitive edge.

In an increasingly competitive global landscape, company brand and image is becoming an important intangible asset. IFRS adoption will help Indian companies raise their profile in global markets and strengthen their corporate brands. An obvious advantage to Indian multinational companies will be the avoidance of reporting financial statements in multiple accounting standards, resulting in significant savings of both cost and time. Compliance with IFRS will encourage investments in Indian companies by global investors, possibly leading to increased market valuations. Moreover, the acquisitions by Indian companies will also be more appropriately valued by the global investment community.

Auditing standards will improve and help lower the instances of corporate fraud which will improve the transparency level of financial reporting in Indian companies. There exists a great distrust of the financial transparency in Indian companies among international investors and Indian companies are suspected of engaging in high levels of earnings management.

Accounting Challenges in the Way of IFRS

GAAP is the current accounting standard in India. There will be difficulties associated with transition as the companies move from GAAP to IFRS. Indian financial system is still evolving to meet the challenges of global investment community. The country opened its markets to international investors in the 90’s so it does not have as extensive experience in meeting the reporting demands of international community as its counterparts in developed countries like U.S and U.K. Thus, the magnitude of challenges in converging to IFRS may be greater for Indian companies than American or British companies. The unforeseen challenges may also mean Indian companies may be less prepared than originally thought.

There will be legal and regulatory challenges that will demand a working collaboration among financial and accounting authorities such as Ministry of Corporate Affairs (MCA), Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA), and Tax Authorities to ensure they don’t have conflicting requirements and rules. India also faces shortage of skilled resources (BDO Haribhakti Consulting Private Limited) that will further complicate the convergence with IFRS. Richard Rekhy, COO of KMPG in India told Times of India that Indian accounting professionals are yet to be exposed to the complexities and methods that would come along new standards. He expressed his concerns that India doesn’t have enough trained people on IFRS and with no previous experience with new standards, most of the current accounting professionals will be redundant with important changes in IFRS (Doval, 20 June 2008). In addition, convergence with IFRS will require a commitment of substantial time and financial resources from the management that may distract that from other important management tasks.

The Economic Times, India reported in 2008 that KPMG planned to raise India employee count from 3,000 to 5,000 by 2010, an increase of about 67%. The firm reported it has been growing at an annual rate of 40% in India. Similarly, Deloitte reported its intent to increase the employee headcount from 7,500 to 12,000 by 2010. The dramatic increase in demand for trained professionals is being led by the country’s expected adoption of IFRS (The Economic Times, 15 April 2008).

We discovered that the scarcity of accounting professionals to meet the challenges of implementing IFRS is not unique to Indian companies but is also a concern in the U.S. A recent study to assess the level of preparedness by the U.S. academic sector to meet the IFRS implementation goals revealed surprising results. A survey data from 2008 reported that 62% of accounting professors surveyed had not taken any steps toward adding IFRS coverage in their academic curricula. This doesn’t bode well for the accounting firms looking to hire students with IFRS audit skills as well as companies looking for students with IFRS implementation skills. Some of this can also be attributed to the accounting professors own lack of knowledge about IFRS standards. In 2008, only 22% of the 535 accounting professors reported feeling qualified to teach IFRS. In 2009, only about 15% reported having a more-than-superficial level of knowledge about IFRS (Miller and Becker, August 2010).

Impact of Divergences in IFRS from GAAP

Under IFRS special purpose entities in which the parent company has a controlling stake will be reported jointly with the parent company. Thus, financial statements will show a greater inherent risk of the parent company which may lead to higher borrowing costs and less favorable credit terms in the capital markets. All business combinations will be accounted at fair purchasing values. Indian companies who have benefitted from listing their assets at historical costs which helped them show higher asset turnover rates and lower depreciation expenses may see erosion of accounting income and operational efficiency. But the benefits of the new rule will be larger asset base and lower tax expense.

Goodwill will not be amortized under IFRS but instead tested for impairment. This will increase taxable incomes for the companies by reducing amortization expense though it will lead to fairer values of goodwill assets. Useful life for depreciation purpose, residual values, and depreciation method will be reviewed on a regular basis, resulting in more reliable estimations of companies’ assets. This will increase investors’ confidence in the accounting asset valuations of Indian companies and generate more foreign direct investment in Indian companies.

Liability portion of hybrid financial instruments such as convertible debentures will be separately accounted for. This will reflect a more accurate picture of the companies’ potential liabilities and unhide some of the risk covered through hybrid instruments. Derivative financial assets and liabilities will be accounted for in the balance sheets.

Prior period errors will be reflected in the opening balances of earliest years presented in the balance sheet. This will prevent the potential temporary boosts to financial statements as well as allow a more reliable year to year performance comparison. Both integral and non-integral foreign operations will be consolidated using non-integral approach. Showing integral foreign operations using non-integral approach may mask the real economic reality of the organization whose liabilities may appear lower to all but the most experienced analysts.

In addition, Indian companies will have to adopt entirely new standards that do not exist under Indian GAAP in any shape. These new standards include accounting and reporting by retirement benefit plans, financial reporting in hyperinflationary economies, investment property, share based payment, agriculture, insurance contracts, and exploration for and evaluation of mineral resources (Sharma). Many of these additional entries into the financial statements has the potential to have material impact on the results of financial reports. Retirement benefit plans will increase the companies’ liabilities since they will require the companies to estimate to their best knowledge, the expected retirement benefits payable in the future. This may negatively impact the credit standing of the companies and will limit the access to debt funding. Financial reporting in hyperinflationary economies will attempt to counter the undesirable effect of inflated values on company’s income and loss statement as well as balance sheet. These inflated values misleadingly exaggerate the operating efficiencies and inefficiencies as well as the assets and the liabilities base of the companies. Similarly, accounting for investment property, mineral resources, and insurance contracts will result in more accurate valuations of the economic reality of the companies.

Indian power industry serves as a good example of the dramatic changes expected by the implementation of IFRS. According to the experts, convergence with IFRS will affect profits, net assets, and debt governance of the power companies. IFRS doesn’t recognize as an asset or liability, the components of electricity prices set by the regulators for future adjustments which is expected to shave off Rs. 745 crore, Rs. 1,034 crore, Rs. 311.5 crore, and Rs. 346 crore from the asset base of Tata Power, Reliance Infra, NTPC, and PGCIL, respectively. This will also negatively impact ratios, debt covenants, profits, and future revenue recognition (Singh and Bhaskar, 3 January 2011).

According to Vijay Mathur of BSR & Co., IFRS may lead to significant volatility in reported earnings and performance ratios such as P/E and EPS. This will require Indian companies to improve investor relations and effectively communicate to them the reasons behind the year to year volatility. Mr. Mathur also expressed concerns about the lack of accounting professionals in India with adequate valuation skills that could help Indian companies in reaching reliable fair value estimates (Kiradoo).

IFRS Implementation Plan

Convergence to IFRS will take place in India in three stages. Companies in the Nifty 50, top 50 stocks on the national stock exchange, the Bombay Stock Exchange Sensitivity Index or those whose shares or securities are listed in the foreign exchange/s or who have a net worth of more than Rs1000 crore will first convert their balance sheet in line with IFRS from April 2011.

Companies not covered in the first phase and who have a net worth of more than Rs500 crore will make the switch in 2013. All the remaining companies will convert the following year i.e. 2014 (Shaheen, November 2010 – January 2011).

Are Indian Companies Ready?

The implementation date for IFRS in India has already been delayed by one year to April 2011. The companies have known for more than three years about the impending implementation of IFRS. There have been concerns regarding the readiness of India’s tax system to comply with IFRS standards. According to Dolphy D’souza of Ernst & Young’s IFRS Services in India, tax strategy with regard to IFRS is not yet clear nor it is anywhere close to finalization. Jamil Khatri, head of KPMG’s IFRS practice in India believes there is a possibility that the companies may have to maintain separate records for tax purpose and both records will be subject to auditing. Even Prabhkar Kalavacherla, member of IASB admits that there will be some tax issues in the beginning but he hopes the wider benefits to companies will be worth it (Shaheen, November 2010 – January 2011).

The tax laws and accounting norms are expected to become global in another two to three years according to Pallav Gupta, head of India Tax at ITC Limited (International Tax Review, November 2010 – January 2011). Mr. Gupta states that IFRS will require major changes in the areas like the valuation of fixed assets which has been done on historical cost  till date. IFRS will bring a degree of subjectivity and also necessitate change in depreciation rules. As Indian companies convert the valuations of their assets from historical cost to fair value, they will face higher deprection expenses and lower income levels which may indicate their past performance metrics may have been exxagerated. But the cash flow position will improve due to lower taxes, improving the liquidity of Indian companies. The asset base will also grow, attracting higher and more attractive valuations from both domestic and foreign investors.

Like many other countries, Indian tax code is based on separate financial statements. India is considering making statements IFRS compliant which may result in a tax code revision. Despite tax challenges, India expects to benefit from greater level of foreign direct investments and cross-border mergers and acquisitions by moving to IFRS.

Indian companies are also concerned about the possible shortage of appropriate talent to implement the necessary industry wide changes. Delay in issuing the regulations is also creating an environment of uncertainty where the companies are worried about the increased complexity of financial reporting requirements. In addition, some are even skeptical of India’s ability to be fully compliant with IFRS. Observers are also concerned that the lack of an adequate monitoring body will result in misapplication of IFRS by certain companies.

There are Indian observors who fear that focus and attention to convergence with IFRS will put the impending deals in jeopardy. General Counsel of Tata, Mr. Bharat Vasani warned companies at International Financial Law Review (IFLR) M&A Forum, “The entire regulatory legal landscape is changing. A lot of new learning will be required. IFRS for example, does not recognize stand alone accounts.” The changes will have a large impact on acquisition financing and capital markets transactions as companies prepare to switch (R. E., April 2010).

Corporate India’s Struggles

Scrapping a national accounting system in favor of IFRS is proving a formidable task for a developing country like India. After their previous experience with Sarbanes-Oxley in which compliance burdens eventually eased, some Indian corporations are wary of committing considerable resources to another experiment. Skeptics don’t see any reason to converge with IFRS since Indian GAAP has proved to be reliable and an effective system over the time. Mahesh Krishnamurti, Managing Director of Resources Global Professionals in India explains, “In India, there is a great deal of pride in Indian GAAP. It is actually very comprehensive, very rigorous. Indian GAAP being what is is, people think that since we mastered Indian GAAP we are not so concerned about IFRS.” (Meyer, November 2009).

The lack of enthusiasm and progress by the regulators, standard bodies, and the government has also dampened the commitment by the private sector. Securities and Exchange Board of India (SEBI) and the Institute of Chartered Accountants of India (ICAI) have held numerous discussions with accounting firms, corporations, and other relevant parties to look into the possibility of customing IFRS to meet Indian needs. There is a speculation that IFRS accounting for acquisitions or the accounting of foreign exchange transactions may be adjusted to reflect local circumstances while others think it will only be limited to complex industries like banking and insurance if it does happen (Meyer, November 2009).

We believe the Indian Government has been slow to guide the business community. The lack of guidance from the government and regulatory bodies has slowed down the implementation plans by the corporate sector but some businesses, primarily those with international listings, have already started using IASB’s official version of IFRS. These include Wipro and Infosys Technologies. According to Manish Dugar, CFO of Wipro Technologies, it took Wipro more than a year to become compliant with IASB’s official version of IFRS and that, too, with plenty of corporate support and help from a big 4 auditing firm Meyer, November 2009). Wipro Technologies is one of India’s leading companies and if it took Wipro more than a year with absolute commitment of time and resources, it will take a lot longer for majority of the companies whose resources come nowhere near those of Wipro’s. Regulators and business have already anticipated this possibility and are considering compromises such as postponements of requirements for certain businesses. SEBI’s original plan in 2007 called for IFRS adoption for any company with annual revenues in excess of one billion ruppees but now some expect the one billion threshold to be raised to ease things for smaller companies (Meyer, November 2009).

Last year, Indian government decided to give two more years to banks and non-banking financing companies to allign their accounting practices with the IFRS. The Ministry of Corporate Affairs extended the deadline to April 2013 at a meeting on March 29, 2010. In addition, Regional Rural Banks and urban co-operative banks with a net worth lower than Rs 2 billion were allowed to follow the current accounting standards. Small sized urban co-operative banks have been given exemption due to their lower exposure to international markets (The Economic Times, 1 April 2010).

IFRS: Will It Improve India’s Accounting Standards

Evidence from international accounting literature indicates that accounting standards alone do not guarantee the improvement in the quality of financial reporting. This is not to undermine the importance of having effective accounting standards at place but a myriad of other factors also determine the overall quality of financial reporting such as managers’ incentives, auditor quality and incentives, regulation, enforcement, ownership structure, and the institutional features of the economy (Holthausen, May 2009).

A study by Ball, Robin, and Wu showed that financial reporting quality is low in Hong Kong, Singapore, Malaysia, and Thailand despite presumably high quality reporting standards because these countries have institutional structure that encourages low quality reports. Ball, Robin, and Wu would suggest India to ensure fair levels of manager and auditor incentives as well as strong institutional features in order for IFRS to result in higher quality of financial reporting. Leuz, Nanda, and Wysocki examined earnings management in three types of economies which are 1). Outsider economies with large stock markets, dispersed ownership, strong investors rights, and strong legal enforcement such as U.S. U.K, Hong Kong, and Australia 2). Insider economies with less well-developed stock markets, concentrated ownership, weak investor rights, but strong legal enforcement such as Austria, Sweden, Germany, and Taiwan and 3). Economies similar to insider economies but with weak legal enforcement such as Thailand, Korea, Spain, and India. The study authors found that the degree of earnings management increased as they moved from outsider economies to insider economies with weak legal enforcements. Another study found that the volunatry adoption of IFRS resulted in market liquidity and lower cost of capital only when the adopters made a serious commitment to transparency (Holthausen, May 2009).

Overall, we cautiously believe that the implementation of IFRS will to lead to improved quality of financial reporting in India because IFRS will result in better investor rights and greater participation by both domestic and international investors. But IFRS alone will not guarantee that India achieves the highest quality standards of financial reporting. For that to happen, the country will need to fairly compensate its accounting professional and auditors, implement strong enforcement, create favorable institutional features, and encourage greater participation by the international investment community in the country’s stock markets.

Earnings Management and Financial Transparency: Where Indian Companies Stand

Evidence indicates that developing countries that are often characterized by weak legal enforcements and shareholders protection exhibit higher levels of earning management than developed countries. India is no exception. Global investors and analysts tend to regard financial statements of Indian companies with deep suspicion and often with total disdain and believe that these companies often overstate incomes and underestimate expenses. Leuz, Nanda, and Wysocki found that management of earnings in India is significantly higher than the U.S. The authors did an analysis of thirty one countries and ranked India nineteenth in terms of aggregate earnings management score. By rank, India fell in the list of countries with the weakest institutional structure and the highest extent of earnings management (Sarkar, Sarkar and Sen, Fall 2008).

KPMG India’s accounting and advisory did a report that revealed passive systems in Indian companies as being perfect breeding places for corporate fraud. 75 percent respondents in the KPMG survey replied India is perceived as a fraud haven (The Economic Times, 15 April 2008). Indian Government set up an agency called Serious Fraud Investigation Office (SFIO) in 2003 that has discovered numerous cases of earnings manipulation and fraud. One of the most high profile case has been that of Satyam Computer Services, one of India’s leading IT companies. SFIO found Satyam’s auditors guilty of wrongdoing while cleared the company’s independent board of directors who were not aware of fabricated documents (The Financial Express). This is consistent with the conlusions of a study by Sarkar, Sarkar, and Sen that independent boards and independent audit committees are found to constrain earnings management (Sarkar, Sarkar and Sen, Fall 2008). Thus, India can improve the quality of financial reporting by requiring non-executive board of directors with exceptions under certain circumstances as well as strengthening auditing standards.

Trade Opportunities for India

The global adoption of IFRS may turn out to be a blessing in disguise for India. Traditionally, jobs requiring specialized skills have been difficult to outsource. Moreover, there are certain country specific factors that make it difficult if not impossible to outsource certain aspects of the business operations. IFRS is the outcome of an increasing realization that the global trade and investment activities will benefit from having a common set of accounting standards. But this very progress towards having a common set of accounting standards will also increase the potential of outsourcing accounting tasks. This will be a boon to global outsourcing trade of which India is one of the major players. This will be a win-win situation for both the developed countries and India because developed countries will be able to lower the costs of their accounting operations where as India will have an opportunity to develop another major industry on the pattern of IT outsourcing. India has advantage over several other emerging economies because not only India has a high level of English proficiency but the country also produces a huge number of qualified graduates.

U.S. is expected to converge to IFRS from U.S. GAAP by 2015 while India will be converging starting April 2011. As is the case with any other country, U.S. will likely face accounting professionals shortages and may benefit from not only India’s accountants supply but also India’s experience as it would already have adopted IFRS since four years by then. Indian accountants will also be familiar with potential implementation challenges by then and will have significantly advanced their know how in the four years between Indian convergence and the U.S. convergence. Jamil Khatri, Executive Director of and Head of U.S. GAAP and IFRS at KPMG estimates that even if 20-30 % of American companies outsource their IFRS implementation tasks to India, it will translate to a big opportunity. Khatri’s expectations are shared by Dolphy D’Souza, a partner at Ernst & Young. Khatri believes U.S. companies may spend anywhere from five million to ten million U.S. dollars on transition which should translate to a billion dollars outsourcing work for India (Kumar, 14 October 2008).

Once implementation is over, India may contiue to provide accounting outsourcing services such as bookkeeping. India is already a world leader in IT outsourcing and bookkeeping is largely a standardized accounting task. India’s IT capabilities will give it an edge in coming up with innovative IT solutions to bookkeeping operations of U.S. companies.

Conclusion

The rising tide of globalization in the last few decades has increasingly connected the countries with each other. Asia has particularly benefitted from globalization with China and India leading the continent. Thus, the emergence of IFRS is no surprise given the need of a global set of accounting standards that will improve the efficiency of global trade and investment activities. India is one of those countries that has the most to benefit from IFRS implementation due to its huge trade surpluses as well as rising exports.

The challenges in the way of IFRS convergence were to be expected because of significant differences between IFRS and Indian GAAP but India is not in a unique position. Other developed countries such as U.S., Australia, and Canada etc. have similar reservations. There have been calls in India to delay implementation and there have been ample confusion due to government’s slow pace of progress in releasing guidelines but India is moving forward with the April 2011 date. India committed to IFRS as a leading member of G-20 so it is not only a matter of meeting its obligations as a G-20 member but also of protecting the country’s credibility and standing in the international trade community.

The country will be able to solve the issues as they arrive along the way. India will probably adopt certain standards to meet its unique problems as some other countries have done or plan to do. The primary focus will be on the companies that engage in international trade, have large market capitalizations, and are attractive to foeign investors. Convergence to IFRS will further boost foreign direct investment in India and provide greater access to international funding sources at more attractive terms.

The companies may see their balance sheets and income states deteriorating but the implmentation of IFRS will bring more international scrutiny of the financial statements of Indian companies, leading to market valuation that are more accurate reflection of the underlying economics of the businesses. This greater scrutiny may even prevent a potential market bubble in Indian stock markets which will have a greater chance of happening if inflated values of Indian companies continue to rise. This greater scrutiny by the global investment community may also lower the probability of a market bubble by decreasing speculative investments in the Indian stock markets which will otherwise result from inaccurate analysis of misleading financial reports of Indian businesses.

As Indian companies have increased their overseas acquisitions and are aiming to become global market leaders, IFRS will prevent the trouble of dealing with financial standards of multiple countries. It will also also make it easier to consolidate the operations of acquired international businesses with that of the parent company. India will be able to resolve major issues with IFRS in the first few years of IFRS implementation but the benefits will keep accruing till long after that. India and China have the opportunity to take leadership positions and increase the influence of Asian countries in shaping the global accounting standards. IFRS will send a positive message to the world that India is serious about bringing the regulations of its financial markets in line with those of the developed countries.                                  

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